CAST Management Consultants, Inc.

CASTing an Eye on Banking - April 22

1: CAST SERVICE HIGHLIGHT

Market, Channel & Customer Segmentation Analysis

Efficiently acquiring and retaining profitable customers

Failing to understand customer needs is one of the most significant barriers to maximizing stockholder value. Offering and aligning products and services to satisfy customer preferences is key to optimizing the potential value of your customers. ‘Business as usual’ market approaches and the random addition of products and services are costly and counterproductive.

Do you know what your customers need and want?

How do your customers’ needs and values vary by market and customer type?
How well does your company meet those needs?
How do your products and services measure up when compared to new and existing competitors?
How well do you understand the market and its future potential?
What products and services are required by each segment and through what channels should they be positioned?

Why CAST for Segmentation Analysis

Extensive experience in customer and market segmentation, needs assessment and conjoint analysis
Broad-based industry experience (banking, insurance, capital markets, retail and commercial products)
Proven tools for analysis and profitability modeling
Knowledge of the inter-relationships of various insurance and financial service products
Database of service delivery and operational best practices

If you would like additional information, please contact Tom Vleisides at (213) 614-8066 ext. 244 or email tvleisides@castconsultants.

2: AMERICAN BANKER - A New Standard for Bank Brokers?

US Banker April 2010

By Steve Garmhausen

The fumbling attempts to overhaul bank regulation have captured headlines, but a less-publicized legislative effort could have a big impact on banks' brokerage operations.

The legislation revolves around what's known as a fiduciary standard, which, in a nutshell, means putting clients' interests first and foremost. Concerned that too many investors are being steered into pricey products when less expensive options are available, lawmakers have proposed that brokers be required to adhere to the same strict standards as investment advisers when selling insurance, annuities, mutual funds and other investments.

Acting in clients' best interests may seem an innocuous requirement, but it could cause headaches for bank-owned brokerages. Brokers for the first time would have to clearly disclose fees and commissions. Product rosters would have to offer more investment options, even if they have lower commissions. Compliance departments would have to build systems to document brokers' adherence to the new rules. Perhaps most daunting, bank brokerages would have to retrain their investment and insurance sales staffs. "The toughest thing would be to train a lifelong commission-focused broker to understand the fiduciary standard," says Karen Kruse, senior vice president of wealth management at First Tennessee Bank. "The busiest people on the face of the earth would be the people in compliance and training."

All that retraining could cost a bundle. Just educating one broker about the fiduciary standard would cost several thousand dollars, says Blaine Aikin, CEO of Fiduciary360, which provides training and other services.

Behind the legislative push is the two-tiered way in which investments and insurance are sold. Professionals who give advice-such as investment advisers-have long been held to a strict fiduciary standard, while brokers operate under a looser set of requirements known as the suitability standard.

Critics charge that brokers are able to get away with things like steering clients into products that pay the broker a higher commission. What's more, critics say, brokers routinely present themselves as advisers, misleading investors into believing that the brokers always put their interests above all else. "They are actively encouraging a relationship of trust and reliance-and they ought to meet the standard that goes with that," says Barbara Roper, director of investor protection for the Consumer Federation of America. Indeed, a 2008 Rand Corp. study found that most investors aren't aware of a difference between advisers and brokers.

The reform legislation has come under attack from brokerage and insurance lobbyists. An early Senate version of the bill, championed by banking committee chairman Chris Dodd, D-Conn., would have held brokers to the same standard as advisers. But Dodd scrapped that bill in the face of Republican opposition, and efforts are under way to create a new one. The House, meanwhile, passed a regulatory reform bill in December that includes what's seen as a weaker piece of fiduciary standard legislation.

A fiduciary standard would not be equally painful for all bank-owned brokerages. Some, like Wells Fargo Advisors, have already "seen the handwriting on the wall," and have started to adopt a fiduciary approach, says Aikin.

But by and large, bank-owned brokerages still do most of their business under the traditional model, and those that have not embraced a fiduciary role could have a tough time adjusting, he says. "If an organization has a heavy sales culture, it's much more difficult to turn the ship."

3: AMERICAN BANKER - A Wealth of Progress

US Banker April 2010

By John Hintze

In the year after it acquired Merrill Lynch, Bank of America Corp. got busy making sure referrals from its bankers helped drive wealth management profits.

Now thanks to a major technology upgrade, its wealth management advisers have another powerful cross-selling tool at their disposal: the ability to view BofA customers' savings and checking accounts along with their investments.

Industry experts say this rare capability is a significant advance toward the complex and elusive dream of building a true one-stop shop. It allows a more holistic view of customers necessary to better assess their needs.

Ultimately BofA also intends to better customize fees, which would be an advantage over its largest U.S. competitors.

Lyle LaMothe, the head of U.S. wealth management at BofA, says the company will be able to offer customers pricing based on their entire relationship-both assets and liabilities-and even share revenue among different units, once the brokerage and banking platforms are integrated sufficiently. "We're headed on the path to relationship-based pricing," LaMothe says. "It's something clients as well as advisors have expressed great interest in, and we're working through various iterations."

LaMothe is a Merrill veteran who headed its wealth management before the merger. Sallie Krawcheck, BofA's global wealth management chief, tapped LaMothe in September to continue in his role. His unit comprises Merrill's 17,000 brokers and BofA's 1,500 reps, who are scheduled to join the Merrill brokerage platform starting in August.

The integration of the two companies and their banking and brokerage platforms is both technological, to share customer data more efficiently, and cultural, to get employees to work as a team. BofA sponsored 19 "road shows" across the country last year to introduce commercial bankers to advisers and have them learn about each other's businesses. It also structured more robust referral programs between the bank and brokerage units.

Already these programs are boosting the bottom line. LaMothe cites the wealth management unit's production growth of 11 percent in the fourth quarter compared with the third quarter. (Production is the fee revenue advisors generate from selling financial products, such as managed accounts or mutual funds. These fees are often recurring.)

Profit margins for the global wealth management business also widened, as more business flowed to advisers. That means, on average, each product they sell is now making more money, after expenses.

"The clearest proof that everything is up and operating efficiently is that our margins were in excess of 20 percent for the quarter," LaMothe says. "I believe there isn't a competitor with similar margins."

Matthew Bienfang, a senior research director in brokerage and wealth management at TowerGroup in Needham, Mass., says profit margins in the brokerage business typically range from the mid- to high-teens.

Referral programs similar to BofA's have been put in place by other companies, but often in piecemeal fashion, Bienfang says. Establishing them formally at such a large institution represents a step forward for integrating often-adversarial banking and brokerage units. It also underscores the rapid progress BofA has made since closing the deal to buy Merrill in January 2009.

LaMothe says the company adopted several "structured mechanisms" over the past year to foster closer ties between bankers and advisers, encouraging them to exchange information and referrals.

It moved wealth managers into bank branches, so they can offer clients ready access to cash management, credit and other banking solutions. Clients also can use an online referral service to identify their own needs and the appropriate contact at the firm.

Another program refers customers in large, bank-run retirement programs, such as 401(k)s, to wealth management advisers who can offer individual retirement accounts and other products.

And BofA is piloting a program that places licensed financial advisers in 35 bank branches. The advisers help banking customers organize their finances, determine their needs and ensure they get to the proper wealth management contact to fulfill them.

Such progress has been rare among large U.S. banks. Integrating not only banking and brokerage platforms but also their disparate cultures has proved enormously challenging. Case in point: Citigroup, the pioneer of the financial one-stop shop.

A decade ago Citigroup's formation from the merger of Citibank and Travelers, an investment and insurance broker, prompted the repeal of the Glass-Steagall Act. Citigroup's ultra-wealthy private banking clients gained access to an integrated suite of banking and investment products through a single relationship manager, though everyone else still had to deal with its multiple units separately.

Now a hobbled Citigroup is quitting the effort. Last summer it sold its Smith Barney unit-the closest rival to Merrill Lynch-into a Morgan Stanley-controlled joint venture, formally distancing the bank from brokerage.

Alois Pirker, a research director at Aite Group in Boston, says some major U.S. banking firms such as Wells Fargo, which acquired Wachovia and its large brokerage unit in October, are headed in a similar direction as BofA. But their progress remains limited. (A Wells Fargo spokesperson said it was too early to comment on the integration.)

Bienfang agrees that BofA stands out. Since Feb. 1, wealth management advisers have been able to incorporate a customer's deposit information, including certificates of deposit, into the financial-planning tools of their Thomson One work stations, with the customer's permission. "That's a big deal," Bienfang says, "because it's a recognition of customers across the enterprise. It's a further expansion of holistic wealth planning." He isn't aware of any other banking company providing that functionality to advisers.

But for any company to maximize the potential of such business combinations, the critical goal is relationship-based pricing, analysts say. Coordinating discounts and other perks should help retain existing customers and draw new ones, whether through bankers or advisers.

LaMothe says perks likely will increase for clients using multiple products and services, but the details are still being mulled. "How do you create two or three products or programs that can take everything into account and end up with a fair fee," he says.

Therein is the big challenge, Bienfang says. The company ultimately doesn't know which products and services each individual values most. Yet it needs to create pricing models that are flexible enough to work for many customers with different needs.

Bienfang says the pricing should ideally depend on where the bulk of a client's relationship with BofA lies. For example, business loans tend to be more profitable than advisory services, so advisory services could possibly be offered free to a significant business-banking customer, and bank revenue shared with the brokerage unit.

LaMothe declined to elaborate on BofA's thinking in this regard, but he says it already applies elements of revenue sharing. "It's taking us down the same path as relationship-based pricing."

One foreign banking company with a significant U.S. presence, HSBC, already offers relationship-based pricing, which isn't surprising given that banking and brokerage aren't legally divided in Europe. Its Premier service requires customers to have at least $100,000 in banking and brokerage products; in return they receive discounts on those products, along with perks such as no closing costs on mortgages. Clients deal with a relationship manager, though not always the same person.

The account is especially geared toward customers seeking easy access to financial services outside their home countries. Perhaps an indication of the success BofA may find, an HSBC spokesperson says the Premier service has experienced double-digit quarterly growth since it was re-launched in 2007, and it now has 350,000 customers in the U.S. alone.

4: AMERICAN BANKER - Boardroom Burdens

US Banker April 2010

By Michael Sisk

The challenges confronting bank directors are coming from every direction. The public is angry about the bailout and hefty bonuses, and shareholders are angry about poor risk management. Politicians want more lending and oversight, and regulators want more caution and deference.

To make matters worse, these demands often conflict. How is a bank expected to increase lending and its capital cushion at the same time in a weak economic environment? How is it expected to lure and retain the talent necessary to survive when pay is being dissected by the media?

If the financial crisis taught directors anything, it's that, no matter what size the bank, they must exercise tighter control over management and be actively engaged in setting strategic direction.

Unfortunately, the crisis also revealed how poorly equipped many bank directors are to do this. They often lack financial services experience and sometimes even business experience. And some are so close to top executives that they are reluctant to challenge decisions-even bad ones.

Nell Minow, the editor and co-founder of the Corporate Library, a corporate governance research firm, says boards are as accountable as management for the banking industry's problems and now must take seriously the "slow, painful process of rebuilding trust with shareholders."

They can start by taking a tougher stance on compensation policies, she says. Directors "have been enablers of outrageous pay packages and they need to stop."

They also need to bone up on accounting, finance, regulation and risk management, all while working with management to help grow their banks and build value.

It's a lot to tackle, to be sure. Following are what experts see as the top five issues facing directors.

1. BOARD COMPOSITION

Most bank boards have had little turnover since the financial crisis began, even though many directors showed poor leadership."That so many are still on the boards of these banks is outrageous," Minow says.

The Cambridge Winter Center for Financial Institutions Policy cites three ways to improve boards. First, increase the percentage of outside directors who have financial services experience. Second, reduce the size of bank boards to create more accountability. Third, and perhaps most controversial, pay board members better.

According to a Cambridge Winter survey, in the second quarter of 2009 just 22 percent of directors at large banks were outsiders with financial services experience. Minow says such figures are astonishing. "Everyone needs to understand financial reporting and bank regulations," she says. "Diversity does not mean someone who doesn't know anything about banking."

The survey found that big bank boards have an average of 14 members, compared to 12 at nonbanks. What's more, large banks actually pay their directors one-third less than what large companies in other industries pay their directors. The average director compensation at 17 of the 19 companies subject to federal regulators' stress tests last year was $209,000, which seems, "to most observers, more than adequate pay for what is, after all, a part-time job," the report says. "But, ironically, it may well be too low for the job that bank shareholders actually need directors to do-providing an active, grounded substantive check on management."

Recently banks have had some success reconfiguring boards. A year ago only 11 percent of Bank of America's board members were outside directors with financial services experience, but by October that figure had jumped to 38 percent, thanks to pressure from shareholders and the Treasury Department. And in February, Citigroup continued a slower remaking of its board. It announced that it would shrink its board from 17 to 15 and add former Mexico President Ernesto Zedillo to help structure its non-U.S. operations.

Some smaller banks also are shrinking their boards and having their own executives step down, to reduce the influence of insiders. After appointing an independent lead director last year, Green Bankshares in Tennessee announced in March that regional executive Ronald Mayberry would not run for re-election when his term expires in April. A director since 2003, Mayberrysaid his decision reduces the number of inside directors on the board, "further fortifying our strong corporate governance practices."

2. COMPENSATION

Directors are under intense pressure to rework compensation policies to reward good behavior and keep talent, but not encourage too much risk-taking and short-term thinking. They also must deal with regulators, who have become increasingly vocal about how banks should-and should not-compensate their executives. In fact, boards that do not overhaul compensation plans when a regulator asks expose themselves to civil money penalties.

A report by Amalfi Consulting summarized three broad principles outlined by the Federal Reserve Board to ensure that incentive compensation arrangements do not encourage employees to be too aggressive. First, these arrangements should balance risk and financial results in a manner that does not reward employees for taking excessive risks. Second, risk-management processes and internal controls should help ensure balance with incentives. Third, banks should have strong corporate governance.

In the past, compensation committees set performance pay based primarily on metrics such as return on equity, return on assets and earnings per share. But going forward, they are likely to add elements such as capital levels and credit quality. Banks also are adjusting timelines so that executives cannot make immediate gains without regard to long-term negative effects. Such tactics include converting cash bonuses to deferred stock and instituting clawbacks to allow for recouping bonuses from employeesif their decisions later prove too risky.

Susie VanHuss, chairman of the compensation committee at SCBT Financial Corp. in Columbia, S.C., told Bank Director magazine that earnings-per-share increases remain important, "but right now, we don't want too much growth with the kind of risk you'd have to take to get it." Asset growth, once a factor, has been removed for now from the executive pay formula, she says, while tangible common equity levels, CAMELs ratings and asset-quality measures have been added.

3. RISK MANAGEMENT

Joseph V. Rizzi, a senior investment strategist at the New York private equity firm CapGen Financial Group, wrote in a commentary for American Banker that directors have "failed to appreciate or contain" the risks bank executives were taking. He says banks should require that independent committees-not management-recruit, retain and remunerate directors; and empower risk management by appointing a chief risk officer that reports to an independent board member.

Many boards are taking steps to set up a healthier risk culture, create reporting structures to better oversee management, and implement new technologies to better quantify and analyze enterprise risk. (Enterprise risk is normally considered to be a combination of credit risk, interest rate risk, liquidity risk, market risk and operational risk).

Enterprise-level risk management also demands top-notch technology tools. But according to a survey of global financial institutions by Oliver Wyman and the Risk Management Association, until recently there's been "a chronic under-investment in data management, analytics, and people dedicated to an integrated view of the businesses." That might be changing. In a December study of North American retail banks by Ovum, 61 percent said they expect to increase spending on technology for risk management.

Also, more boards have gotten serious about appointing experienced chief risk officers. Huntington Bancshares hired Kevin Blakely as chief risk officer last year. He had served at the RMA and managed risk at KeyCorp.

4. PERSONAL LIABILITY

Regulators are getting more aggressive about assessing civil penalties against individual directors for a bank's performance, an unnerving possibility that few directors considered when they joined boards. While standard D&O insurance typically covers shareholder lawsuits, the real danger comes when regulators levy penalties based on their interpretation of the "standard of care" in the jurisdiction in which the bank is based. These fines are generally not covered by insurance, and typically range from $5,000 to $250,000, says Jeff Gerrish, chairman of Gerrish McCreary Smith Consultants in Memphis.

Most liability claims will be based on loans that "never should have been made" had the directors been doing their jobs, Gerrish wrote recently on his blog. To fend off such lawsuits directors must prove that their reliance on management to make these loans was reasonable; however, "if they received criticism of management or the credit administration function of the bank," and did nothing, then, arguably, their reliance was not reasonable, he says.

Directors who want to determine their exposure should understand the standard of care and assess their conduct in view of that standard. Another factor for regulators in deciding whether to pursue a director legally is determining if there would be any recovery available. But directors can insure themselves against such a possibility; they can get a policy covering their portion of a civil money penalty or pay for such coverage on the bank's policy.

5. KNOW WHEN TO QUIT

Given how many board members do not have the skills or time to be truly engaged, it's critical that individual directors frankly assess their own talents and contributions to a board. David Baris, executive director of the American Association of Bank Directors, says, "If you're consistently out voted; if you disagree with the direction of the bank; if you're not satisfied with management and management has not changed even after your urging; generally, if you're ineffectual, it might be time to resign."

That was the conclusion of Robert Schweiger, who resigned in January from the board of the struggling $253 million-asset FPB Bancorp in Port St. Lucie, Fla. In his resignation letter, Schweiger said he lacked confidence that the management can protect shareholder value, maintain proper capital levels and manage assets. He also lacked confidence in the board's ability to direct management effectively.

To help directors educate and evaluate themselves the AABD and other banking trade groups offer workshops. The AABD also offers questionnaires to help individuals judge their own qualifications as a director.

However, Baris advises against concocting reasons to quit-such as the fear of liability. "What has happened has happened, and if you believe you can contribute to the health of the bank, that's a good reason to stay."

5: AMERICAN BANKER - Dimon Exceeds Peers in Apology for 'Mistakes'

American Banker Monday, April 5, 2010

By Matt Monks

Jamie Dimon delivered a message that some pundits and lawmakers have been waiting for a while to hear from the country's bankers: an apology for helping ruin the economy.

"Some of the mistakes we made may have contributed to the crisis. For those, of course, we are sorry," the chairman and chief executive of JPMorgan Chase & Co. wrote in a lengthy letter to shareholders last week.

"Our two largest mistakes were making too many leveraged loans and lowering our mortgage underwriting standard."

Dimon is among a handful of big bank CEOs to get reflective about the financial crisis in recent weeks in their annual missives to investors. Though the heads of Citigroup Inc., Wells Fargo & Co., U.S. Bancorp and other institutions have vastly different assessments of how their institutions fared in the recession, their letters show that they all tend to agree that the worst has passed and that some kind of regulatory reform is needed.

None of them went so far as Dimon's offering a mea culpa for its role in the meltdown, though.

Dimon -- who described the company's performance last year as "not great" -- urged lawmakers to pass some kind of financial reform this year. He advocated a systemic risk regulator as well as a banking-industry funded mechanism for winding down failed institutions.

"The era of bailouts must end, and the oversight of system-wide risk must increase," Dimon wrote.

Dimon said he also regretted that JPMorgan Chase participated in the Federal Deposit Insurance Corp. guarantee program that enabled it to issue some $40 billion in unsecured debt because "we didn't need it."

Citigroup CEO Vikram Pandit said his company took its "need" for special assistance from the U.S. government "very hard and very personally." While it was "essential" that the New York banking giant issue a lot of stock and take other actions to strengthen its capital base, he said: "I deeply regret that they also resulted in significant dilution to our shareholders."

Still, he described 2009 as a "watershed year" for the company as it made gains restructuring the business and narrowed its loss from a year earlier.

On the regulatory front, Pandit called for higher capital standards for "systemically important institutions" as well as "more transparency" for derivatives trades.

John G. Stumpf of Wells Fargo struck a patriotic tone in his letter, saying the company took $25 billion from the Treasury Department because "we understood our role as Americans first, bankers second."

He said Wells Fargo is doing its part to help mend the economy by lending to businesses and people and helping homeowners modify their mortgages.

Stumpf said lawmakers should tread carefully when it comes to overhauling the financial industry. He said a new consumer protection agency could create "regulatory conflicts that would inadvertently create new risks." Like Dimon, he called for a "resolution authority" for liquidating large institutions.

The heads of U.S. Bancorp, PNC Financial Services Group Inc. and Capital One Financial Corp., meanwhile, used their shareholder letters to engage in a bit of chest-thumping while giving general support for new industry regulation.

Richard K. Davis said 2009 was a "remarkable year" that "distinguished" U.S. Bancorp as a "very special company." Capital One's Richard D. Fairbank called it a "defining year."

"We have weathered the storm well and are emerging as one of the nation's strong banks."

6: AMERICAN BANKER - Get Cash for Not Using Cash

US Banker April 2010

By Maria Aspan

Cash-back rewards, reliably popular with consumers, are expensive for banks to offer on debit cards, and thus relatively rare.

But TD Bank paid out what industry observers call "very generous" cash-back rewards in a promotion last quarter, to persuade its customers to use their debit cards more. Those who participated could get up to $50 back on grocery purchases, and the bank readily conceded that the promotion would be unprofitable.

"TD is actually losing money," says Sunil Kirpalani, the head of debit card and operations for the $150 billion-asset bank. "It's done to spread the message of debit and using debit."

The promotion underscores how some banks are willing to take a short-term loss to get consumers in the long-term habit of using debit cards for everyday purchases. With new overdraft rules expected to make checking accounts less lucrative, banks are counting on interchange fees from debit usage to boost their income for years to come.

"Many studies have shown that once consumers start using the card at the point of sale, they will continue to do so," says Lee Manfred, a partner at First Annapolis Consulting.

So it makes sense for TD to offer "some pretty rich rewards" for a limited time, he says.

The TD promotion ran from Jan. 17 to March 7. For every $100 spent on groceries during that period, customers could opt to receive $10 in cash or gift cards, up to the $50 limit.

TD chose groceries, a relatively recession-proof expense, because many consumers still buy them with cash and checks rather than plastic.

Manfred says most checking accounts already have debit cards linked to them, but "only 60-ish percent" of those customers actively use the cards for purchases. So rather than issuing new cards, growth hinges on getting people to use their cards more frequently.

For TD and Visa-which Kirpalani says is helping to fund the promotion with "marketing dollars"-another goal is to convince cardholders to sign for debit purchases rather than use their PINs. Signature-based debit purchases are much more lucrative for banks, because of the higher interchange rate on those types of transactions. Most banks that offer cash-back debit rewardsdo not offer them for PIN transactions.

What's attractive about tying rewards to grocery or gas purchases is "they're frequent," so more conducive to reinforcing new behavior, says Philip J. Philliou, a partner in the consulting firm Philliou Selwanes Partners."If you can change someone's behavior, the payoff could be quite significant over the long term," he says.

Kirpalani, who was a debit product management executive at Bank of America before he joined TD in January, acknowledges as much. "When are we going to make money back? Maybe two, three years from now," he says.

Kirpalani would not provide projections for the additional debit business TD expects to gain over the long term. But, by mid-February, the promotion could already be considered a success. More than 58,000 customers had registered their debit cards for the promotionduring its first three weeks-exceeding Kirpalani's projections for enrollment during the entire sevenweeks it would run.

Cash-back rewards are more common on credit cards than debit cards. Rewards are largely funded out of what a bank makes on interchange fees, and those fees are higher for credit than debit.

Though the use of cash-back debit rewards has been rising in recent years, upcoming restrictions on overdraft protection might stymie such experiments, says Tony Hayes, a partner in the consulting firm Oliver Wyman.

A rule taking effect July 1 bars banks from providing overdraft protection, and charging the related fees, on automated teller machine withdrawals and debit card purchases, unless a customer opts in for the service.

"The profitability of debit card programs will decline," Hayes says. "As a result, we would expect to see far fewer cash-back programs tied to debit in the future."

7: AMERICAN BANKER - Greenspan Takes Little Blame for Financial Crisis

American Banker Thursday, April 8, 2010

By Donna Borak

WASHINGTON -- Arguing that regulators are not likely to correctly predict the next crisis, former Federal Reserve Board Chairman Alan Greenspan said Wednesday that banks must hold more capital and face higher collateral requirements.

The former central bank chief said more capital and liquidity was essentially the only way to prevent another financial meltdown.

"If we had adequate capital and liquidity, whatever else we do would be helpful, but not critical," said Greenspan during a hearing of the Financial Crisis Inquiry Commission. "If we have everything else but not adequate capital and liquidity, the system will fail to function."

Greenspan also said policymakers should raise collateral requirements and force banks to issue "contingent capital bonds," which in the event of a possible debt failure could be automatically converted to equity.

Greenspan was the first to testify as a part of three-day hearing by the commission, which is charged with uncovering the causes of the financial crisis. The panel spent much of the afternoon on Wednesday focused on Citigroup's subprime lending activities, a topic it is likely to pick up today when a former Citi chief executive, Chuck Prince, and a former Citi board member, Robert Rubin, is set to testify.

Greenspan spent much of the hearing on the defensive, arguing that he could not have foreseen the crisis and had acted properly during his 18 years at the helm of the Fed. He also undercut the argument that regulators will ever be prepared to spot the next crisis.

"History tell us regulators cannot identify the timing of a crisis or anticipate exactly where it will be located or how large the losses and spillovers will be," he said. "Regulators cannot successfully use the bully pulpit to manage asset prices, and they cannot calibrate regulation and supervision in response to movements in asset prices, nor can regulators fully eliminate the possibility of future crises."

Greenspan also said the system was simply too complicated for regulators to properly oversee it.

"It's a different world that we have," he said. "The complexity is awesome. And I wish I knew a simple answer to this problem."

During the hearing, panelist and former regulator Brooksley Born accused the Fed of failing to do its part in preventing the financial crisis.

"You appropriately argue that the role of regulation is preventive," Born said. "But the Fed utterly failed to prevent the financial crisis.

The Fed and other banking regulators failed to prevent the housing bubble, they failed to prevent the predatory lending scandal, they failed to prevent our biggest banks and holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts."

She added, "Didn't the Federal Reserve fail to meet its mandates, fail to meet its responsibilities?"

In response, Greenspan returned once again to the issue of capital, arguing that the banking system has been undercapitalized for the past 40 years.

"We were undercapitalizing the banking system probably for 40 or 50 years, and that has to be adjusted," he said.

Greenspan also attempted to shift the blame to Congress, arguing that even though lawmakers criticize him now for not making rules to curb certain abusive subprime lending practices, Congress would have been outraged if he had.

He also criticized the credit-rating agencies and a rise in global demand for securitized subprime mortgages.

"If the Fed as a regulator tried to thwart what everyone perceived in, I would say, fairly broad consensus that the trend was in the right direction, homeownership was rising, that was an unmitigated good, then Congress would have clamped down on us," he said. "There is a lot of amnesia that is emerging currently,"

Ultimately, Greenspan suggested that looking back was pointless.

"The issue of retrospective in figuring out what you should've done differently is a really futile activity because you can't, in fact, in the real world do it," he said. "I was right 70% of the time, but I was wrong 30% of time. And there are an awful lot of mistakes in 21 years."

8: AMERICAN BANKER - No One Was Sleeping as Citi Slipped

Or so it would seem as execs, regulators refuse to take blame

American Banker Friday, April 9, 2010

By Cheyenne Hopkins

WASHINGTON -- No one is willing to take responsibility for the near collapse of Citigroup Inc.

Former executives and regulators, testifying Thursday before the Financial Crisis Inquiry Commission, all tried to shift blame for the giant company's problems.

Charles Prince, Citigroup's former chief executive, pointed a finger at the credit rating agencies and overly complex products -- like collateralized debt obligations -- that no one understood.

Robert Rubin, a former Treasury secretary and former chairman of Citi's executive committee, laid the blame on a confluence of market events while saying he was out of the loop for most of the company's decisions.

The bank's regulators, meanwhile -- John Dugan, the comptroller of the currency, and his predecessor, John D. Hawke -- criticized the institution, its managers, other regulators and the market in general.

If there was an underlying consensus, it was this: the financial crisis was either entirely unforeseeable or should have been spotted first by somebody else.

Even the apologies hit that point.

"I'm sorry," said Prince near the opening of the hearing. "I'm sorry that the financial crisis has had such a devastating impact on our country. I'm sorry for the millions of people, average Americans, who have lost their homes. And I'm sorry that our management team starting with me, like so many others, could not see the unprecedented market collapse that laid before us."

The political theorist Hannah Arendt, speaking about a very different situation, once said that "where all are guilty, no one is; confessions of collective guilt are the best possible safeguard against the discovery of culprits."

Perhaps for that reason, commission members attempted to place blame squarely on the witnesses. Commission Chairman Phil Angelides said that, no matter their defense, Prince and Rubin were responsible for the downfall of Citi.

"It just seems to me at the end of the day the two of you in charge of this organization did not have a grip on what was happening," he said. "I don't know that you can have it two ways. You were either pulling the levers or were asleep at the switch. … As we try to recover from this calamity, I'm not so sure apologies are as important as assessment of responsibility."

Douglas Holtz-Eakin, an economist and former director of the Congressional Budget Office, said that while Rubin perhaps could not have seen the crisis, he should have known that underwriting standards were out of whack.

"The question is not whether you could have foreseen the whole crisis," he said. "The question is, could you have foreseen the spark that lit the crisis, which is the poor standards in underwriting, the poor assessment of risks associated with mortgages, the inadequate hedging and capital provisioning against that?"

Bill Thomas, the commission's vice chairman, said that the executives had to take some blame.

"Something was created and assumptions were made and behavior has to have consequences," he said. "To say you are sorry and to make your stock argument Mr. Prince … to make the argument that a simple apology still allows you to maintain a certain income based on what devastated everyone else doesn't fit the scale test, no matter how often you feel sad about what happened."

Prince ultimately blamed much of Citi's problems on CDOs, which he said were complex and entirely misunderstood. He said the company, its risk officers, regulators and credit rating agencies believed CDOs were low-risk activities. As it turned out, they resulted in $30 billion worth of losses.

Still, Prince did not think that proved the company was engaged in too many activities to properly supervise them all. He said the board and management became aware of problems with the CDOs too late to do much about them.

"I personally do not think Citi was 'too big to manage,' " Prince said. "I do not think that the broad, multifaceted and diversified nature of Citi's business materially contributed to our losses or to the financial crisis more generally -- indeed smaller, more narrowly focused firms suffered in similar ways."

Dugan, too, put much of the blame on CDOs, partly as a way of defending his own agency. He said the bank, which the Office of the Comptroller of the Currency oversaw, did not damage the holding company, while Citi's securities broker-dealers, which managed the CDOs and were overseen by the Securities and Exchange Commission, were at fault.

"The overwhelming majority of Citi's mortgage problems did not arise from mortgages originated by Citibank," Dugan said. "Instead, the huge mortgage losses arose primarily from the collateralized debt obligations structured by Citigroup's securities broker-dealer with mortgages purchased from third parties."

The OCC believed Citi had a handle on its risk, but the bank did not expect the damage the CDOs would do, Dugan said.

"Companies that thought they had limited exposure when it turned out they had much more risk," he said. "The difference with Citi and several other institutions we do not supervise is they had so much more of it."

For his part, Prince said regulators actively looked at the CDOs, but also misjudged their risk.

"What happened here is that the regulators also mistook the ultimate safety of these CDO positions," Prince said. "I don't think it was a situation where the regulators didn't know what was going on. As I said, they lived with us day by day by day. I think that the mistake that was made by everyone about the value of these instruments was fundamentally also made by the regulators."

Asked by Angelides whether regulators should have dug deeper, Dugan said the agency did the best it could. "I believe we followed up quite rigorously," Dugan said. "I'm certainly not going to say we were perfect."

Rubin, meanwhile, distanced himself from Citi's day-to-day decisions while listing a variety of causes for the financial crisis. He cited low interest rates, market excesses, excessive borrowing, a rise in housing prices, increased consumer leverage and a drop in housing prices.

The board "was not a substantive part of the decision-making of the institution," Rubin said. "I think all of us, not just at Citi, but all of us in the industry failed to see the potential for this serious crisis and failed to see the function of the multiple factors at work, bear some responsibility and I think we all have a great deal to regret in that respect."

He said the company was so big that management could not have seen the problems coming.

"There isn't a way for an institution with hundreds of thousands of transactions a day involving something over a trillion dollars that you are going to know what's in those position books," Rubin said. "I didn't know it when I was at Goldman Sachs and you wouldn't know it on the board of Citi either. You rely on the people there to bring you problems when they exist."

Yet he, too, said the size of Citi was not the problem.

"I don't believe that Citi is too big to manage," Rubin said.

He said the best solution is to give the government resolution powers, raise capital requirements and conduct stricter regulation. He also recommended more leverage constraints, derivatives oversight and enhanced consumer protection. "If you had greater capital and margin requirements, it would cause people to focus more on trying to understand the risk they were taking and probably result in less use of these instruments," Rubin said. "And I think, on balance, that would be a desirable outcome."

9: AMERICAN BANKER - Opting In to Overdraft for Fee Income, Customers

American Banker Monday, April 5, 2010

By Kate Davidson

Don't expect community banks to follow Bank of America's lead and drop their overdraft protection programs in advance of upcoming regulatory changes.

Many smaller banks say they plan to keep offering such services because demand is strong and overdraft fee income is essential. Consultants say that these banks, unlike Bank of America, do not necessarily need to curry favor with the public by getting rid of the service.

Marcia Johnson, the corporate operations officer at Glacier Bancorp, a $4.1 billion-asset company in Kalispell, Mont., said it considered dropping overdraft protection on its 221,000 checking accounts. But overdraft fees generate considerable income, and the bank decided offering protection was better for customers than going without.

"We envisioned some of the situations -- being in the grocery store line and having all our things on the belt and being declined," she said. "Our thought was that we wanted to go through the process to give them the opportunity to opt in."

At the $11.6 billion-asset TCF Financial Corp. in Wayzata, Minn., which has 1.7 million checking account customers, overdraft fees account for about 40% of net income, said Jason Korstange, director of corporate communications. The company does not plan any change in its program, other than notification and an opt-in form.

Consultants predict that community banks that embrace the rule change and reduce their fees may stand to gain the most in terms of revenue and accounts.

"Those banks that are lowering that price, they're going to win Bank of America's checking accounts," said G. Michael Moebs, the founder and principal of Moebs Services, a Lake Bluff, Ill., company that consults for 2,000 credit unions and banks. "I believe very strongly that community banks are going to pick that revenue up."

Bank of America earned praise from consumer groups when it announced in February that it would stop offering overdraft protection for certain transactions in anticipation of a new Federal Reserve Board rule that will require customers be offered the chance to opt in by Aug. 15.

Under changes in the Fed's Regulation E -- which enforces the Electronic Funds Transfer Act -- by July 1 banks must obtain permission from new customers for automatic overdraft protection on nonrecurring debit card transactions and automated teller machine withdrawals.

By Aug. 15, banks must obtain opt-in approval from existing customers.

Though analysts have said that the rule change could lead to a decline in fee income, Moebs predicted that customers who generate the majority of overdraft fees -- the "frequent fliers" -- will opt in.

"These are people who have gotten used to this," he said.

A Moebs survey found that, of the 11.4% of banks that have begun preparing for the rule change, a little more than half plan to raise overdraft fee amounts, 18.4% said they would cut fees and 11% would offer overdraft protection for the first time. About 13.5% planned to drop the service.

Banks say overdraft protection saves customers the embarrassment of being rejected when they do not have enough money in their accounts.

"We wish our customers didn't have to pay that fee, but it's a service that customers need and demand," John Buhrmaster, the president of the $336.4 million-asset 1st National Bank of Scotia in New York, said in an interview.

Buhrmaster said his bank does not have a formal overdraft protection program -- branch managers have discretion to approve charges, and customers are notified with a phone call or letter.

Rather than creating a formal program, he said, the bank will waive the fees and continue evaluating overdrafts case-by-case.

But consumer advocates counter that overdraft fees are often unreasonable and a handful of small transactions can lead to hundreds of dollars in such fees.

The Consumer Federation of America, in a press release last month, urged banks to follow Bank of America's lead "instead of launching a hard-sell campaign to persuade its customers to opt-in to the most expensive form of overdraft coverage."

Yet at least one prominent banker has decided to waive overdraft fees and figures the potential income won't outweigh the hassle of complying with the new rules.

Arthur Johnson, the chairman of the $435 million-asset United Bank of Michigan in Grand Rapids and chairman of the American Bankers Association, said his bank looked at the number and types of overdraft transactions, and compared it with the cost of notifying its customers and updating its computer systems to implement overdraft protection only on certain individual accounts.

"It's a little complicated, and we just kind of made the call that we would rather spend our time delivering quality services to our customers than fiddling around in the backroom meeting any new compliance requirements," he said. "We have enough of those already."

10: AMERICAN BANKER - Rate Spike Would Hit Asset Quality, Not Net Interest Margins

US Banker April 2010

By Sean Jones

In his annual report, Federal Reserve Board Chairman Ben Bernanke reassured Congress that the Fed intends to keep interest rates low. Nevertheless, many bank-debt investors and the general market remain nervous, and they are convinced that external events could still push rates up.

U.S. banks are mostly well positioned against such an event, and their margins could even widen from a rate spike. Nevertheless, some could find themselves absorbing another heavy blow to their asset quality.

There are several reasons to be concerned about the impact of a sudden rate rise on U.S. banks. When a bank's wholesale debt profile becomes skewed toward short-term maturities, for instance, it becomes quite vulnerable to such an event. Moreover, higher interest rates mean that it is more likely there will be delinquencies in the already-troubled books that hold variable-rate consumer and commercial real estate loans. Additionally, funding costs will go up, and such rates tend to hobble the bank's ability to offload nonperformers by selling them.

This situation highlights a major difference between the banking crisis of the early 1990s and the current one. In the later stages of the 1990s crisis, interest rates were high. Unlike today, however, the Fed then had the luxury of cutting rates, thus improving the banks' ability to sell off bad assets-which, in turn, helped to facilitate a recovery.

Some of the "what ifs" that could drive rates up were reviewed at a symposium the Federal Deposit Insurance Corp. hosted in January. The speakers, Donald Kohn, the Fed's vice chairman, and Laurence Meyer, a former member of the board, essentially backed Bernanke's position that an interest-rate spike was not likely any time soon, but they also identified other situations that could provoke a sudden rate rise. In addition to citing the collapse of the U.S. dollar as a possible instigator, Meyer said the market could develop an unfounded view on its own that inflation would soon become a problem. If such a perception gets enough traction, Meyer believes that the Fed would have to boost rates simply to protect its credibility as the ultimate defender against inflation-even if its imminent arrival was imaginary.

The speakers also pointed out that there is a very sizable inventory of financing that requires investors. When that need meets a scarcity of funding, rates will naturally be driven up. For instance, the U.S. government has to fund its sizable deficit and the banks themselves will have to roll over a cluster of debt maturities in the near future.

Over the last decade or so, banks took advantage of stable, low interest rates to raise large amounts of funds via debt issuance and securitization. More significantly, however, managements aggressively sought to take advantage of low rates to reduce their cost of funds in response to competitive pressures; the result was that they shortened their debt maturities, despite periods of relatively flat yield curves.

We estimate that the banks we rate worldwide will face maturing debt of about $10 trillion by the end of 2015, and $7 trillion of this will occur by the end of 2012. In the United States and the United Kingdom, banks will be challenged by more than $2 trillion of maturing debt by the end of 2012.

Most U.S. banks-95 percent-are not liability sensitive, so an unexpected spike in interest rates would not necessarily result in a squeeze on their net interest margins. Instead, their assets would re-price more quickly than their liabilities. Managements will keep their assets short to ride the benefit of rising rates, and they will want to keep their shorter-term securities reinvested in higher-yielding instruments.

However, timing will be everything. Not every bank will be perfectly positioned to handle the arrival of higher rates, but their managements may seek to extend their securities books to make some temporary gains anyway-and then get caught short. One consequence would be that they would wind up paying out more to stay in the game.

Any surprise interest-rate spike will demand close monitoring during the coming months.

11: AMERICAN BANKER - Reg E Changes Pose Tech Challenges

Bank Technology News April 2010

By Rebecca Sausner

Bank of America and Citi are taking the higher-and less profitable-road by not offering fee-based overdraft protection to debit card users who exceed their available balance. But many other banks in the industry can't afford to abandon the entire revenue stream, leaving them with a marketing and technical challenge to get customers to opt in or out of overdraft protection by summer. "The folks who really live on these NSF fees, they can't afford to follow suit. They can't even think about it," says Bart Narter, Celent's senior banking analyst.

The technical and operational challenges posed by the changes to Reg E hit three touchpoints: marketing, or how to effectively reach those customers who currently drive the most NSF/OD revenue; compliance, how to receive and create an audit trail for the requisite opt in or opt out decisions; and core banking, how to integrate the rules associated with the new preferences into the bank's core processing application.

Alex Calicchia, evp and chief marketing officer at MidSouth Bank, says his institution outsourced most of the technical and operational tasks associated with marketing and compliance to a marketing vendor. The bank intends to aggressively market to the segment of its customer base that use the service most frequently. "For those active users, you'll see multiple touch points-branch, email, direct mail and calling," he says, noting that they're projecting opt-in rates in the 20 to 30 percent range. MidSouth's marketing vendor, CustomerStream, will handle the direct mail pieces, and is building a central lockbox to receive bar-coded mailed responses. The provider will then scan those cards, building an image database that can be used both for compliances purposes and to provide a feed of those who have opted in to MidSouth's core processor, Jack Henry. CustomerStream also built a Web applet to handle on-line opt-ins, and is handling all the necessary confirmation mail and email responses required by the regulation.

Customers who walk into the branch will be able to make their choice known to front-line personnel, who will enter it into an internally-built database, Calicchia says. That data will also be sent to CustomerStream to handle the confirmation and tracking piece, Calicchia says.

MidSouth's approach to blunting the effect of the Reg E changes is the prototype that marketing pros are advising. But mounting an integrated, multi-channel campaign requires technological sophistication that many banks don't have in house, "Only the largest banks, the top 50...have that level of sophistication of sending out customized marketing messages," Narter says.

Once the opt-ins or outs are obtained, and tracked for compliance, things get easier. Banks that use vendor-provided core processing platforms can rely on their core vendor to handle the heavy-lifting required in making changes to the core.

"It's another regulation they have to comply with, it's not rocket science from a programming standpoint," Narter says.

12: BANKINSURANCE.COM - Americans Increasingly Debt-Averse and Savings-Friendly

NEWS IN BRIEF - APRIL 12 - 18, 2010

The majority of Americans (55%) say they plan to spend the next six months focused primarily on reducing their debt. When asked what they would do if they were to receive extra money over the same time period, 38% said they would save the money, 32% said they would use it to pay overdue bills; 18% would invest it; and 10% said they would spend the money, according to a Citi survey of 2002 adults conducted in March by Hart Research Associates.